As Yields Approach Parity, Corporate Bonds Could Be The New Treasuries

By Michael Aneiro

We’ve finally gotten to the point where corporate bond yields are so low that in some cases they’re starting to dip below the yields on the Treasury bonds against which they are benchmarked.

To be sure, this is still a very limited occurrence, and it comes amid a widespread investor clamor for yield that’s suppressing corporate bond yields across the board. But yields on short-dated paper of some big, highly rated U.S. industrials have “traded through” the yields on comparably dated Treasury bonds, a sign that investors are increasingly viewing corporates as an alternative to Treasuries, or at least as an alternative to other once highly-rated alternatives such as European sovereign debt. This is happening as rating agencies are again warning that the U.S. needs to get its budget in order or risk another credit downgrade. Patrick McGee and Katy Burne report in today’s Wall Street Journal:

Bonds of Exxon Mobil (XOM) and Johnson & Johnson (JNJ) are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.

For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds. But some market observers said some fundamental changes in the financial health of U.S. companies relative to the government, including the fact that some corporations are more highly rated than Uncle Sam, suggest it could become a longer-lasting trend.

“If it grows to be more like dozens of issues, then it stops becoming an anomaly and it becomes a big deal,” said James Bianco, founder of Bianco Research in Chicago. Mr. Bianco recalled a few similar instances in the past 30 years but none lasted long.

The story points out that companies continue to set record-low bond yields for new bond issues, including last week’s Microsoft Corp. (MSFT) offering of five-year bonds that produced a record-low sub-1% yield and a spread of just 0.27 percentage point above comparable Treasurys, the narrowest premium on such debt going back to 1994, according to Dealogic. “These are truly unprecedented conditions for blue-chip companies in the debt markets,” said Brent Callinicos, treasurer of Google Inc. (GOOG), in the Journal story, which notes that Google bonds due in 2014 currently yield just 0.02 percentage point over Treasurys.